When the stock market becomes turbulent, investors want to do something to protect themselves. The impulse to react is a natural human response when you perceive a threat, whether that threat is a charging grizzly bear or a crashing bear market. The key is to keep a cool head and make rational decisions about how to respond. In either situation, running in panic can increase your danger.
The Danger of Panic Selling
When you give into the temptation to sell off investments when they start to significantly lose value, you cement your current losses. While it’s possible that you’ll prevent further loss this way, it’s also likely that you’ll miss out on future gain. In fact, a Bank of America study concluded that missing the 10 best stock market days of each decade since 1930 would have lead to a dramatic drop in returns: 91% rather than the 14,962% that a hypothetical investor would have seen if they held a steady course through market turbulence. Frequently, the market’s best days follow its worst, and bear markets can present some excellent opportunities to buy more stock in reliable companies while prices are deeply reduced.
So, what is the rational response to a market downturn? Keep your focus on the long term. This is a great time to revisit your strategy and your portfolio to ensure they’re in line with your goals. If you find that they’re not, then work with a trusted financial advisor to make any necessary shifts in your investments.
Risk Tolerance Review
With the dramatic changes to our economy that COVID-19 has brought about, many Americans have experienced a decline in their current and/or expected income. Some may retire earlier than expected as a result of job losses. Factors such as these influence the amount of risk an investor is prepared to take on. If you have or may soon need to dip into your emergency fund or take a withdrawal from your retirement fund, then it may be time to scale back the risk in your portfolio. Consult with your advisor to determine the right investment balance in light of your current financial picture.
Whether or not the appropriate balance in your portfolio has shifted as a result of the economic crisis, the value of your investments likely has. When stock prices decline, your share of assets in equities shrinks as well. For example, Morningstar reported that an investor who began 2020 with 60% of assets in stocks and 40% in bonds would have had approximately a 50/50 allocation on March 20. Your financial advisor can help you determine your current allocation and rebalance your investments if necessary. Regular rebalancing allows you to keep control of your risk allocation and may help you recover more quickly from market downturns.
Diversification protects your portfolio from upsets in particular market segments by spreading your assets across many different segments. On one level, this means holding a mix of higher-risk and lower-risk investments, such as stocks and bonds. Within these types of investments, it also means choosing a variety of individual investments, such as a mix of stocks in small, mid-sized, and large companies across different industries and bonds from different issuers and with various terms and maturity dates. If some of your investments increase in value while others decline, this suggests that your portfolio is diversified. If, on the other hand, your assets tend to show similar performance over time, you probably need to give some attention to diversification.
Consult with Your Financial Advisor
Bear markets present opportunities as well as risks. Rather than running away from the market in panic, take a deep breath and consider your options. Meet with your advisor and revisit your investment plan to make sure it’s aligned with your current goals and financial situation.
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Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.